>EAGLE EYE ON 29/09/09

Week ends negative

Markets on Sep 25, 2009: Volatility continues
Nifty opened negative after its sharp recovery from its yesterday’s low and continued its zigzag movement throughout the day in 4930-5000 range. Today also, Nifty failed to close above 5000-mark but it held on to its crucial support of 4900. Nifty continues to trade in an upward
parallel channel-- the upper end of the channel is at 5100 and the lower end at 4900. So, going forward its crucial for Nifty to close above 5000 level to gain further momentum on upside.

On daily chart, Nifty is trading above its 20 daily moving average (DMA) and 40DMA i.e. 4823 and 4691 respectively, which are crucial supports going forward. The momentum indicator (KST) has given negative crossover and is above zero line. Market breadth was positive with 761 advances and 505 declines on NSE and 1,676 advances and 1,188 declines on BSE.

On hourly chart, Nifty is trading below its 20HMA and 40HMA i.e. 4983 and 4971 respectively, which are now resistances in short term. The momentum indicator (KST) has given a positive crossover but is trading below zero line.

Nifty and Sensex closed in red, lower 28 and 88 points respectively. Of the 30 Sensex stocks, Dr Reddy’s Laboratories (up 10.50 %) and Ranbaxy Laboratories (up 4.08%) were the top gainers, whereas Tata Steel (down 2.85%) and ICICI Bank (down 2.50%) were the top losers.

To see full report: EAGLE EYE 290909

>ZEE NEWS (EDELWEISS)

Good show continues

■ Growth in revenues from ads on regional channels
ZNL expects growth in ad revenues from regional GEC channels. However, ad revenues from news channels are likely to be flat in Q2FY10. Also, increasing adoption of DTH and incremental revenues from analogue are expected to boost subscription revenues.

■ Growing traction in new channels
Till now, ZNL had 3 strong driver channels – Zee News, Zee Bangla and Zee Marathi. Zee Telugu competes closely with Eenadu and Maa Telugu for the second spot in viewership share. Zee UP, launched in April 2009, too is performing well. Zee Kannada is also close to breaking even. Zee Business is likely to benefit from the strong IPO ad pipeline. Going forward, we expect Zee Telugu, Zee Kannada and Zee Business channels to become the other growth drivers for ZNL.

■ Zee Bangla’s strategy is more sustainable
Unlike its competitor Star Jolsha, which is resorting to disruptive programming, Zee Bangla has continued with its strategy of gaining sticky viewership through low cost programming, which is likely to be a more sustainable strategy (as seen in Hindi GEC).

■ Outlook and valuations: Regional play; maintain ‘BUY’
We continue to like ZNL as it is one of the best picks in the buoyant regional market. It has multiple drivers-strong bouquet of news and regional channels, improving viewership, likely overall improvement in ad industry from H2FY10, successful new shows, and strong management in place. We expect it to be one of the key beneficiaries of the likely revival in ad spends in H2FY10, and hence, maintain our ‘BUY’ recommendation on the stock. On relative return basis, the stock is rated ‘Sector Outperformer’ (refer rating page for details).

To see full report: ZEE NEWS

>U.S. Financials – Making Progress (CITI)

Larger Banks Outperforming Regionals

■ Most large banks profitable, regional banks struggled in Q2 09

■ Larger banks benefiting from capital markets and mortgage refi “boomlet”

■ Regionals under pressure because of commercial real estate, middlemarket loans

■ Liquidity and capital issues are off the table for most large banks

■ Some signs of moderation in NPA growth

To see full report: U.S. FINANCIALS

>TTK PRESTIGE LIMITED (LKP SHARES)

INVESTMENT RATIONALE

• TTK Prestige Ltd, India's largest manufacturer of kitchen appliances has made a successful transformation from being a reliable consumer brand to an aspirational brand and the Rs4bn company now derives 75% of its revenues from products launched during the past four years. The company employs close to 900 people and has manufacturing facilities in Hosur and Coimbatore with its new unit at Uttarakhand to begin operations by the end of the current fiscal.

• Pressure Cookers now form 53% of its revenues; non-stick cookware and gas stoves account for 25% of its revenues and more than 20% of its revenues come from Kitchen Electrical Appliances like mixer grinders, hobs, electric chimneys and induction cook tops.

• Prestige Smart Kitchen outlets based on the 100% franchise model now has 202 outlets and contributes 18% of its revenues. Its second retail initiative - Prestige Kitchen Boutiques now has 9 outlets offering a wide range of modular kitchens.

• TTK Prestige presently operates at a capacity utilization of 57% and we believe that increased capacity utilization and geographical expansion beyond southern parts of the country would enable the company to grow its top-line at a CAGR of 19% over the next two years.

• Having exited the loss making US business and with a virtual debt-free status this fiscal we expect bottomline to start looking very healthy on the back of free cash generation.

• TTK Prestige is jointly developing its real estate of ~7 acres in Bangalore into a residential cum commercial complex which when completed in FY'12 should fetch Rs1.4bn to the company.

• TTK Prestige being an innovative company constantly developing new products we have factored an ad-spend of more than 8% of revenues in our forecasts.

• We forecast EBIDTA margins to stay well above 11% this fiscal and the next despite the same almost touching 13% during the first quarter of this fiscal.

OUTLOOK & VALUATION

• With the repeated cut in excise duties on branded pressure cookers we believe that TTK Prestige with its clear strategy of providing total kitchen solutions would stay ahead of the curve and maintain its first mover advantage in this growing consumer durable space.

• With an ROCE of 41% and attractive valuations of 6xFY'11E we remain optimistic on the prospects for TTK Prestige and re-iterate our BUY CALL on the stock with an 18 month price target of Rs400.

To see full report: TTK PRESTIGE

>RELIANCE INDUSTRIES (GOLDMAN SACHS)

Outlook remains positive, adverse case outcome priced in; Buy

What's changed
RIL has sold 15 mn in treasury stock, representing about 7.5% of total treasury shares, raising Rs31.9 bn of cash. This does not alter our positive outlook on RIL; it reduces the leverage on RIL’s consolidated balance sheet and could be a precursor to levering up for future growth.

Implications
We estimate RIL will generate about US$27 bn of excess cash flow over FY2011E-14E, after committed E&P capex, without any major projects lined up to consume this cash (RIL should turn net cash by FY13E). This could lead it to pursue inorganic growth opportunities in E&P and core businesses, in our view. We believe valuation, scope, and earnings accretion from such growth initiatives could drive RIL’s medium-term stock performance beyond the earnings visibility from D-6. With optionality of cash adding to strong E&P growth, a stable core business, and the stock already pricing in a full Rs325/share impact of an adverse outcome in the gas dispute (in our view), we find risk/return very favourable after today’s stock correction.

Valuation
We reiterate our Buy on RIL with a 12-month SOTP-based target price of Rs2,430, implying potential upside of 16%. We believe the E&P business will improve RIL’s earnings profile by: (1) adding a higher proportion of non-cyclical earnings, and (2) improving overall operating margins.
Moreover, we find RIL’s refining valuations do not reflect its efficiency and scale in an improving business environment, possibly due to the overhang of the court case on the stock price. RIL’s petchem segment is also trading at discount to regional multiples, in our view. We have currently valued refining and petchem segments at mid-cycle multiples. Following the recent underperformance, RIL is at 20% discount to the Indian market P/E.

Key risks
(1) Delay in D-6 ramp up, (2) court case overhang, (3) refining weakness

To see full report: RIL

>INDIAN ORGANIZED RETAIL (IDFC SSKI)

THRIFTY FOR PROSPERITY!!!

Indian Organized Retail (IOR) was in the fast forward mode over the last few years. While scaling up 3x in just three years to USD18bn (40%+ CAGR), caution was thrown to the winds when it came to business economics. However, the first round of casualties (Subhiksha, Indiabulls Retail, etc), and poor profitability as also leveraged balance sheets – exacerbated by growth slowdown – for survivors have forced them to focus on operational efficiency. Importantly, cost pressures have receded with lower competitive intensity and measures are being adopted to enhance capital efficiency. Pace of scale-up has been redefined to align with internal cash accruals as there is no recourse to external capital. This, we believe, would converge to gradual (25% 3-year CAGR) but profitable growth and healthier balance sheets. It is re-rating time for the sector and we bet on Shoppers Stop, Pantaloon Retail and Provogue.

Mad rush for scale at any cost…: IOR, in the rush to capitalize on under-penetration and gain critical mass before influx of foreign competition, took to the path of rapid scale-up over the last few years. However, even as the sector grew 3x in size over FY06-09, profits were elusive. While costs doubled as everyone chased the limited resources, disproportionately higher scale-up of front-ends ahead of back-ends led to capital inefficiency. Leveraged growth became more a norm than an exception.

…giving way to prudent growth: As external capital taps dried up, players have woken up to the imperative of raising capital within to fund future growth. IOR is now in the course correction mode and while the competitive landscape is more settled, employee costs are trending down and lease rentals have corrected 30-50% from the peak. Players are focusing on efficient manning, inventory management, space rightsizing, etc. These initiatives, we believe, would drive margin expansion for retailers even as same store sales are picking up.

Re-rating ahead; we are Overweight: We see significant profitability improvement and healthier balance sheets ahead as retailers adopt a calibrated growth stance using internal capital. This, we believe, would drive a re-rating in sector valuations. Shoppers Stop stands to be the key beneficiary of easing cost structures (570bp margins expansion over FY09- 11E) while Pantaloon Retail, the largest Indian retailer, too would be attractive as its balance sheet gets deleveraged. We maintain our bullish stance on Provogue given Prozone’s value unlock potential. We are Neutral on Titan due to its rich valuations.

To see full report: INDIAN RETAIL